1 Accounting for OPEB Retiree Health Benefits Committee September 11, 2006

2 GASBOPEB

3 GovernmentalAccountingStandardsBoard

4 OtherPostEmploymentBenefits

5 Other Post-Employment Benefits (OPEB)   GASB Statement No. 43 (Plans)   GASB Statement No. 45 (Employers)

6 Effective Date for Employers: Employers (City and County of San Francisco, Unified School District and Community College District) need to report the liability as of June 30, 2008

7 What are OPEB’s? Payments made directly to former employees or their beneficiaries, or to third parties on their behalf, as compensation for services rendered while they were still active employees Essential form of compensation If payment is deferred, creates a liability Significant and growing element of cost

8 Related Employment Costs City Only (in Millions of $$) ActiveRetiredTotal Pension $ 199.5$ Health Benefits $ 230.5$ 101.0$ Total$ 531.0

9 How Can You Pay for OPEB’s?   TWO APPROACHES: Pay-as-you-go Advance funding Example (work life ) Pay-as-you-go (start financing in 2025) Advance funding (finance between )

10 What’s Typical?   Pension Benefits Typically advance funded in both the public and private sectors   OPEB Traditionally pay-as-you-go funding Consistent with focus on near-term impact on budget

11 How Do You Calculate the Liability? Three-step process (actuarial valuation): Project anticipated future benefits Discount future benefit payments to their present value Allocate the total present value of future benefit payments to the appropriate period of employee service

12 Active Years of Active ServicePost-Employment 1. Project future payments $ $ $ $ $ $ $ $ $ 2. Discount to present value $ $ $ $ $ $ $ $ $ 3. Allocate to periods of employee service

13 What Actuarial Assumptions are the Basis for Projecting Future Benefits?   Turnover   Retirement age   Mortality   Inflation rate   Healthcare cost trend data   Investment return   Post-retirement benefit increases

14 How Much is the City’s Estimated Unfunded Actuarial Accrued Liability (UAAL)? Pay as you go$4.9 billion Advance fund$3.0 billion

15 Why the Difference in Estimates? If the City “advance funds” the benefits, those monies can be invested for an estimated return of 8% (like funds in the Retirement system). Those investment returns are kept in the trust to pay for benefits and reduce the amount of new money the City has to contribute Under “pay as you go” there are no investment returns to offset the need for future payments

16 How Much is the Annual Required Contribution (ARC)? Pay as you go$456 million Advance Funded$ 290 million

17 Elements of ARC: (in millions $) Pay asAdvance you go Fund Normal cost$287$128 (new costs) Amortize UAAL*$169$162 (costs to date) Total$456$290 *Pay off over 30 years

18 Contributions as a % of Payroll Assume $2 Billion Annual Payroll Current budget $101m/$2,000m = 5.1% Advance funding $290m/$2,000m = 14.5% Pay as you go $456m/$2,000m = 22.8%

19 Medical Cost Increases are BIG Assumption   The Actuaries assume that medical cost increases for will be 9%-10%, but increases will slow in the future to 4.5% to 5.5% per year by 2016   If costs are 1% higher, the liability grows to $3.5 for funded plan and $6.1 billion for un-funded   If costs are 1% lower, the liability drops to $2.6 for funded plan and $4.1 billion for un-funded

20 What Must You Report on Financial Statements? The amount paid each year for post employment benefits is shown as an expense The City is not required to “book” the entire liability in 2008 The difference between the Annual Required Contribution and the amount actually paid is shown as a liability

21 Net OPEB Obligation (NOPEBO) Cumulative result of under funding Annual Required Contribution In 2008, if the numbers stay the same and no action is taken, we would “book” ARC$456 M Paid$101 M NOPEBO$355 M

22 Do We Have to Fund the Liability?   NO!   GASB has no authority over budgeting, only financial reporting   Standards may nonetheless provide incentive for change

23 What Happens if We Don’t Advance Fund the Liability? Money is owed and we will pay it one way or the other. The only decision is when and at what price Rating agencies will consider funding decisions when rating bonds which could affect the cost of borrowing May become part of larger financial/political discussion about how well the City is run